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Report lists pricing as one of key challenges for province’s LNG industry

The high capital costs of building liquefied natural gas plants on British Columbia’s coast threaten to out-weigh the savings from shorter shipping distances to Asian markets, which underlines the need for proponents to negotiate solid prices, according to a new report from the International Energy Agency.

Pricing is listed as one of the key challenges to development of the LNG industry in B.C. in the 2014 edition of the IEA’s Medium-Term Gas Market Report.

The report notes the Chevron/Apache Kitimat LNG proposal remains the most advanced project and in the lead to be Canada’s first major producer. However, buyers and sellers will need to reach a compromise that acknowledges the higher capital cost of Canadian projects for development to proceed.

“In spite of shipping savings made from the shorter distance between Canada and Asian markets, the higher cost of building LNG plants and constructing pipelines from the gas fields to the plants is expected to out-weigh the freight savings,” the report says.

That’s the reason B.C.’s proponents need to negotiate a price that includes a high enough liquefaction fee, it says.

The report also notes other Canadian proponents have secured the interest of potential customers by involving them as partners in their projects.

Shell Canada’s LNG Canada proposal at Kitimat, for instance, involves a consortium that includes PetroChina, Korea Gas and Mitsubishi. Malaysian state-owned firm Petronas’s proposal for a major plant near Prince Rupert includes Japanese commodity firm Japex, Chinese state-owned Sinopec, the Indian Oil Corporation and a PetroleumBRUNEI.

Minority partners secure rights to percentages of the proposed output of their plants, which might be “a deciding factor” in building Canadian plants that have roughly twice the capital cost of their American competitors.

The arrangement gives the partners an incentive “to reduce the cost as much as possible while at the same time ensuring reasonable returns on the project.”

However, with none of the proponents having made a final investment decision to date (Petronas is expected to be the first by the end of this year), the IEA doesn’t expect they will factor into the forecast period of their report, which carries through to the end of 2019.

Growth in natural gas demand slowed over the past year. The IEA pegs global demand to increase at 2.2 per cent per year through 2019, compared with an expectation of 2.4 per cent in the 2013 report.

However, a doubling of natural gas use in China will underpin growth during the forecast period, with LNG producers in Australia, the U.S. and Canada taking the lead in expanding trade in LNG, versus pipeline gas.

And the large volume of natural gas China needs will leave room for both pipeline gas from Russia and Central Asia and LNG imports.

“We are entering the age of much more efficient natural gas markets, with additional benefits for energy security,” IEA executive director Maria van der Hoeven said in releasing the report at a conference in Montreal.

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